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Robert Abbott
Robert Abbott
Articles (898)  | Author's Website |

4 Additions to the Buffett-Munger List

CACI, Griffon, MasTec and Nova Measuring Instruments join an exclusive list

December 01, 2020 | About:

Want to invest like Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio)? One approach would be to buy what they buy, after the fact (even though we may not be able to get the same prices as they did).

Another helpful tool is to check the companies that make it through the Buffett-Munger Screener at GuruFocus. This screener looks for companies that meet four important criteria that Buffett and Munger are known for placing high value on:

  • High predictability rank; in other words, companies that have shown they can grow their revenue and earnings consistently.
  • They have competitive advantages or moats. This gives them more freedom in setting prices, which means higher earnings.
  • They have grown their businesses without using much debt, helping keep their costs low.
  • They are fairly valued or undervalued, in the context of earnings growth. The key metric is the PEG (or PEPG) ratio, calculated by dividing the price-earnings ratio by average Ebitda growth over the preceding five years.

Like Buffett, you want to buy a wonderful company at a fair price, not a fair company at a wonderful price. Because of changes in earnings and stock prices, the constituents of the Buffett-Munger Screener change from time to time. As of Nov. 30, four new firms had made the cut: CACI International Inc (NYSE:CACI), Griffon Corporation (NYSE:GFF), MasTec Inc. (NYSE:MTZ) and Nova Measuring Instruments Ltd (NVMI).

CACI

Based in Arlington, Virginia, CACI provides professional services and information technology to various branches of the federal government. Those branches include defense, homeland security, intelligence and healthcare. It is best known for its national security services.

Its predictability rating is 4.5 out of 5 stars, so it has a record of consistent growth:

CACI revenue and EPS chart

In its 10-K for the fiscal year that ended on June 30, 2020, the company noted that while it is not "substantially dependent" on intellectual property, it does have quite a few trade secrets that make a difference. Presumably, that would include extensive knowledge of the federal government's needs and wants.

Turning to the question of debt, its cash-to-debt ratio was 0.6 (in this context, a ratio of 1.0 would mean the company has enough cash and equivalents to immediately repay all its debt). The interest coverage ratio is 9.9, meaning it has enough net income to pay its interest expenses almost 10 times over.

CACI took on quite a bit of debt earlier in the decade, but since then has kept it relatively steady:

CACI long-term debt chart

Is it fairly valued or undervalued based on the PEG ratio? The PEG ratio currently stands at 1.47, indicating it is modestly overvalued (1.00 = fair value).

Summing up, CACI International has a good predictability record and a moat. It does have a substantial, although manageable, amount of debt and it is modestly overvalued.

Griffon

The Griffon Corporation is a conglomerate with three main lines of business:

  • Defense Electronics: This includes the Telephonics Corporation, which offers "sophisticated intelligence, surveillance and communications solutions that are deployed across a wide range of land, sea and air applications."
  • Consumer and Professional Products: Through its subsidiary The AMES Corporation, it manufactures and supplies products for home storage and organization, landscaping and enhanced outdoor lifestyles.
  • Home and Building Products: This division is made up of the Clopay Corporation, which manufactures and markets garage doors to residential and commercial customers.

The company enjoys a predictability rating of 4.5 and has raised its revenue and Ebitda over the past decade, although not always steadily:

Griffon revenue and Ebitda chart

Each of the divisions has its competitive advantages, although it appears none of them are very wide, in my opinion. Griffon's median return on equity (ROE) over the past decade was just 5.4%, suggesting a weak moat.

The company carries a relatively high debt load, with an interest coverage ratio of just 2.33. This is a 10-year chart of its long-term debt:

Griffon long-term debt chart

Based on its PEG ratio, Griffon is almost fairly valued at 1.13.

Overall, it has generated returns quite consistently, but it appears to have a weak moat, significant debt and onl a fairly-valued ranking.

MasTec

This $4 billion company describes itself as follows:

"MasTec Inc is a leading infrastructure construction company operating primarily throughout North America. Its principal activities include engineering, building, installation, maintenance, and upgrades of communications, energy, and utility infrastructure. The company installs wireless, wireline, and satellite communications; oil and gas pipeline infrastructure; conventional and renewable power generation; and other industrial systems."

It has a 4 out of 5 stars predictability rating, based on its revenue and Ebitda history:

MasTec revenue and Ebitda chart

It lists five competitive advantages in its 10-K for 2019: diverse customer relationships, a reputation for reliable customer service, a 90-year history in the industry, an ability to respond quickly and effectively and an experienced management team. That suggests at least a narrow moat, which is backed up by a 10-year median ROE of 14.77%.

How is it doing with debt? Not well, for a Buffett-Munger Screener stock. Its cash-to-debt ratio is just 0.16 while its interest coverage is 6.49. It has also been growing its debt:

MasTec long-term debt chart

Undervalued would be the conclusion reached from the PEG ratio, which is currently 0.47.

Overall, we see mixed signals from MasTec. It has good results for predictability and a moat, as well as a good valuation, but it has a poor debt situation.

Nova Measuring Instruments

At first glance, this stock appears to be a gem, with a financial strength ranking of 8 out of 10 and a profitability ranking of 9 out of 10.

Based in Israel, Nova is a $1.1 billion semiconductor equipment manufacturer. It provides "metrology solutions" (metrology is the science of measurement) for advanced process control in semiconductor manufacturing. Most of its revenue originates in Taiwan, but it also brings in business from other Asian countries as well as the U.S. and Europe.

It has a predictability rating of 4 out of 5, although there are a few bumps in its revenue and Ebitda growth:

Nova Measurement revenue and Ebitda chart

In its 20-F for 2019, Nova stated it has the following competitive advantages: 160 existing patents and 40 patent applications in the U.S., as well as 110 patents plus another 100 pending in other countries.

As manufacturers keep pushing the limits of technology, which introduces more process steps and new materials, the more opportunities there are for Nova's metrology solutions. These elements suggest at least a narrow moat, and its median ROE of 12.76% over the past 10 years backs that up.

It has done a good job of managing its debt, with a cash-to-debt ratio of 6.81 and an interest coverage ratio of 537.44. In other words, this company has a lot more cash and net income than debt and interest expense.

As this chart below shows, Nova had no debt between 2010 and 2018, but then took some on in 2019:

Nova Measuring long-term debt chart

The PEG ratio suggests modest overvaluation, it stands at 1.46. On the other hand, the GuruFocus Value chart finds it to be significantly overvalued:

Nova Measurement GuruFocus Value chart

Nova has a good predictability ranking, at least a narrow moat and a small debt load, but I think it is too costly to be a real Buffett-Munger Screener stock.

Conclusion

Four stocks have been added to the Buffett-Munger Screener list, and each has potential, in my view. All have good predictability rankings, and with perhaps the exception of Griffon, appear to have protective moats. Except for Nova, all have more debt than most value investors would find comfortable.

MasTec stands out in the group for being undervalued, while the other three have PEG ratios between 1.00 and 1.50 which suggest modest overvaluation.

While none of the four is a perfect Buffett-Munger Screener stock, all have their virtues and might be worth considering.

Disclosure: I do not own shares in any of the companies named in this article.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


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